Let's take a look at the sale of assets then a corporate liquidation, and the tax consequences of this type of transaction. So we'll start again with our usual company. We've got a outside basis of 200, an inside basis of 100. We've got no liabilities, to make things easy. We're going to assume that the corporation sells its assets to somebody else for 300. Could be to another company or an individual. The selling corporation is going to be taxed on an inside basis. In other words, because they're selling the assets, the tax authorities will say, "Well, you're selling the assets," "so we're gonna tax you on the basis of the purchase price," which is 300, versus basis, which is 100. So they will be taxed, or the corporation will be taxed on a capital gain of 200. The actual assets do change hands. They will change title and they're going to be owned by the new corporate entity. The old corporation, the corporation that sold the assets, will be left with cash and a lot of equity. It's effectively what we call a cash shell. In liquidating this, additional tax may need to be paid if the cash being taken out of the entity before it's closed down is larger than the outside basis. Some of the rules here depend on who actually owns the corporation. In a lot of countries, dividends between corporations are not taxable. So in that case, it would just be if an individual owns a company, then there will be taxation on the liquidation. Now let's take a look at the impact for the acquirer. The acquirer is paying 300 for the assets, and that becomes their new inside basis for both accounting purposes and tax purposes. These assets can be depreciated for accounting purposes and for tax purposes at the new revalued level. And because the basis of tax and accounting is the same, there's no need for a deferred tax liability. Now let's summarize the impact of the sale of assets then the corporate liquidation. Pre-sale, we had a company. the original purchase price of the assets were 100. The original purchase price of the shares was 200. So the inside basis was 100, the outside basis is 200. Post-sale, the vendor is left with a lot of cash on the balance sheet of the company and book equity of 100, and they'll have a gain on the sale of those assets of 200. So the corporation is potentially gonna be taxed on the gain on the sale. That is in the corporate shell. They will still have their normal shareholding and still have their original tax basis of 200 for that shareholder. Post-sale, for the acquirer, assuming the acquirer is a corporation, they will have assets coming onto their balance sheet of 300 and they'll have some financing, and that could be equity or it could be debt. And the tax authorities will recognize the assets been retitled, and they will see those assets on the acquirer's balance sheet of 300. And the depreciation will start from the 300, both for accounting and for tax. Now, this is the nub of the issue. The double taxation for the vendor. Remember, the vendor now is sitting with a cash shell. The company is 300 in cash, it had book equity of a 100, and they're sitting on a gain of 200. So the first thing that happens is that after the sale we'll assume a tax rate of 20%, and we need to reflect the additional tax that the corporation, not the shareholders, the corporation is going to pay. So the book equity is 100. The gain on the sale post-tax is 160, because 20% of 200 is 40. And that is going to leave the corporation betide to the tax authorities. So now the corporation will have 260 of cash after paying their tax bill on the sale of the assets. The acquirer shareholding still sits there. It's still having an outside basis of 200. But we've paid tax once, because the corporation sold the assets and had to pay tax on the gain. Now we're going to take a look at liquidation. So this is where the corporation is shut down and any proceeds are given to the acquiring shareholders. And we're going to assume in this case that any dividends paid to the shareholders are gonna be taxed at 20%. Note that if the owners are a corporation, potentially there won't be tax on those dividends. But let's assume that we are liquidating corporate entity and the owners are regular shareholders, high net worth individuals, or company. So in this case, they'll distribute the capital, and there's no tax charge on that capital. But they're going to have to distribute the gain of 160, and there'll be tax to be paid on those retained earnings at 20%, which means the proceeds after tax is 160, less 20% tax, which will give us 128. The taxation of these dividends will depend on the jurisdiction, and probably, in most situations, only gonna be taxed if they're paid to individuals. This means that the shareholders will actually only end up getting 228 in cash. So originally the corporation, after selling the assets, had cash of 300. The corporation was taxed once on the sale of the assets, which meant that the cash then dropped to 260. And when the company's liquidated and that 260 of cash is paid to the shareholders, there's a second round of tax to the dividends to shareholders, which means the shareholders will only end up with 228 in cash.
